What is the Minimum Deposit on a Mortgage?

One of the first steps after deciding you’d like to purchase a house is to begin saving up for your house deposit. Your deposit is usually the most expensive part of getting a mortgage.

Typically, you need to put down a deposit of at least 5% of a property’s value. With the average UK house price sitting at around £265,000 as of August 2021, the minimum deposit amount that you would need for the average house in the UK is £13,250 – 5% of £265,000.

In this article, we are going to explain a little more about the minimum deposit on a mortgage, how to save for one and what to do if you don’t have one.

What is a mortgage deposit?

A mortgage deposit is a lump sum that you transfer to the solicitors when you’re about to complete on the purchase of a property. The remaining money required for the purchase will come from a mortgage lender. This will determine your mortgage payments going forward.

Your deposit is worked out as a percentage of the overall value of the property that you are purchasing. Your mortgage is then based on the amount left, which is the amount that you will be borrowing. That’s why the larger the deposit you can put down the more favourable lenders will consider your case. This can potentially secure you more competitive interest rates, depending on meeting the lender’s criteria.

How much deposit do I need for a mortgage?

Whilst it is possible to put a 5% deposit down, the bigger the deposit the better. A bigger mortgage deposit (10-15%+) makes you less of a risk to lenders. For this reason, you are likely to be offered a wider range of mortgage deals and lower interest rates.

Lower interest rates mean you will pay less in interest. This will in turn bring your mortgage repayments down. The mortgages with lower interest rates are only available when you have a larger deposit to put down.

Mortgages with the lowest interest rates are only available when you have a larger deposit. The borrowing rates reduce at 5% intervals. This means that if you increase by just a few per cent, for example from 15% to 17%, you’ll probably have access to the same deals as before. Stick to hitting the 10%, 15%, 20%+ milestones to open up those better deals.

So, how do you know how much money you will need for a deposit? When calculating this, you need to think about the typical property prices in your area (check Rightmove or Zoopla) and how much money you can realistically afford to spend on your monthly repayment costs.

If you need a helping hand, that’s exactly what mortgage advisors are for. Why not give us at Mortgage Light a call? We’ll work through the numbers with you and give you an idea of the minimum deposit you may need to save.

How to get a mortgage with a low deposit

The minimum deposit percentage that you are able to put down is 5%. Doing so will mean that you are borrowing 95% of the property’s value. For a while, 95% mortgages were pretty hard to come by – particularly when the pandemic hit. 10% was the minimum deposit that many lenders would accept.

However, the government recently launched its 95% LTV mortgage guarantee scheme in April 2021. This scheme is designed to help buyers get a mortgage with a 5% deposit. It offers a much-needed helping hand after the financial impact of the COVID-19 pandemic. As a result of this scheme, more lenders are now able to offer 95% mortgages.

If you would like to make use of the 95% LTV mortgage guarantee scheme, speak to an experienced mortgage broker and advisor such as us here at Mortgage Light. We’ll be able to approach the most suitable lenders on your behalf.

Can you get a mortgage without a deposit?

You may be able to access a 0% deposit mortgage, depending on the lender’s appetite to risk. They are generally are linked to guarantor mortgages or schemes where the lender takes a charge out on another property that is unencumbered. This means that you need to have a suitable mortgage guarantor to support your mortgage application.

A mortgage guarantor is generally a parent or close family member. They take on some of the mortgage risk by acting as a safety net for your borrowing. In some cases, a family member can put the deposit money for the property purchase in a secure account that is linked to the mortgage. This acts as a deposit without being transferred to the solicitors.

In order to access a 0% deposit mortgage, you would need to meet the eligibility criteria of the mortgage lender. You must have sufficient disposable income available to cover your monthly mortgage commitment, and/or have cash savings or equity in property available to offer as security in case of your default.

Whilst this might sound like the answer if you are unable to save a deposit, guarantor mortgages are pretty risky. If you can’t pay the mortgage, your guarantor is liable to pay it instead which could potentially land them in financial difficulty.

Find out more – ‘What is a mortgage guarantor?’

Low deposits with the shared ownership scheme

Aside from the 95% LTV mortgage guarantee scheme, you can also take advantage of the shared ownership scheme if you are struggling to raise a deposit.

The shared ownership scheme is designed to make homeownership affordable for those on lower incomes. In order to be eligible for the shared ownership scheme, you must have an income of less than £80,000 a year (£90,000 in London) and not already own a property.

With the shared ownership scheme, you purchase a share of a property, typically around 30-50%. You then take out a mortgage on this proportion that you own. You pay rent, usually to a Housing Association, on the remaining proportion of the property. As you are only purchasing a share of the property, you only need a mortgage for this share. As a result, your deposit will be much lower.

For example, if you purchased a 30% share of a £195,000 property (which equates to £58,500), your minimum deposit needed would be £2,925 (5% of £58,500).

A minority of lenders even offer 100% mortgages with the shared ownership scheme, so no deposit necessary. These are, however, a very specialised product so ensure you use a specialist broker, such as us here at Mortgage Light to help you potentially one of these mortgages.

Find out more – ‘What is a shared ownership mortgage?’

How to save up for a mortgage deposit

So, you are ready to begin saving for your mortgage deposit. You have worked out how much you can save each month. You know the average property prices in your desired area and how large of a deposit you can realistically save – 5%, 10%, 15% etc. Now it’s time to start putting money away.

If you go through each month just putting money aside here and there without tracking the pennies, you could set yourself up to fail. Regular savings will meet you meet your financial goals much quicker. Working out a budget is a good first step when it comes to saving for your deposit.

Take a close look at your incomings and outgoings and see where you can cut back and trim. Could you shop around for cheaper energy bills? Opt for taking lunch to work instead of eating out? Once you have worked out your necessary spending, you will then be able to see how much money you are left with. This will determine how much you can afford to save each month.

When you know how much you can afford to save each month, treat this amount as another bill that needs to be paid. Put it aside as soon as your paycheck comes in. You may want to shop around for the best savings account for you to keep your savings in.

Whilst there’s nothing wrong with a traditional savings account, you may have to pay tax on the interest your savings generate. Perhaps you could deposit your savings into a lifetime ISA, where your money will remain tax-free. You can put in up to £4,000 a year until you are 50. The government will add a 25% bonus to your savings, up to a maximum of £1,000 a year.

Perhaps you are lucky enough to have family who may be able to help you financially. The ‘Bank of Mum and Dad’ is actually now considered the seventh biggest lender in the UK mortgage market. It’s become fairly normal for parents, in particular, to help their children take a step onto the property ladder by contributing towards their deposit.

Find out more – ‘How to buy your first home’

 

Once you have saved your deposit, it’s time to contact a mortgage advisor and broker. They will help to find the right mortgage deal for you. At Mortgage Light, we have helped thousands of people just like you take their first step onto the property ladder.

If you are looking for a knowledgeable and dependable expert to be in your corner during the house purchasing process, get in touch with us at Mortgage Light.